By Stanley White
TOKYO (Reuters) - The dollar was pinned near multi-week lows against most major currencies on Thursday as fading gains in U.S. Treasury yields reduced the greenback's interest rate advantage.
The euro was in focus ahead of a European Central Bank (ECB)meeting later on Thursday, where any positive comments about the economic outlook or hints of tapering bond purchases are expected to send the common currency racing higher.
Sentiment toward the dollar has weakened as last month's spike in Treasury yields reverses course, but some analysts say the outlook over the longer term remains positive due to a strong U.S. economy and an improved coronavirus vaccination programme.
"We've confirmed that demand for Treasuries is healthy, which means there is no upward pressure on yields," said Junichi Ishikawa, senior foreign exchange strategist at IG Securities in Tokyo.
"In this environment, the dollar will test the downside against the yen. The euro is different because there are signs that people inside the ECB are more optimistic about the economy, which raises questions about tapering."
The dollar stood at 107.99 yen, close to a seven-week low.
The euro was quoted at $1.2043, not far from its strongest since March 3.
The British pound bought $1.3939.
The onshore yuan rose to 6.4828 per dollar to reach its strongest level since March 12.
On Wednesday a closely watched auction of U.S. 20-year Treasuries drew strong demand, which helped the fixed income market regain its composure and put a cap on yields.
Last month, Treasury yields spiked to their highest in more than a year due to worries about accelerating inflation, which prompted dollar bulls to pile into the currency.
However, this trade has started to unwind this month as yields reversed course, and investors will now look to the U.S. Federal Reserve's meeting next week for new trading cues.
The ECB is not expected to change policy when it meets later on Thursday, but analysts say this meeting will set the stage for June, when policymakers have to decide whether to slow bond buying.
Dutch central banker Klaas Knot has already said tapering is possible, and the euro could resume its rise against the dollar on any signs that a reduction in bond purchases is gaining more support within the ECB, analysts said.
Monetary policy has drawn renewed attention after the Bank of Canada signalled that it could start hiking interest rates in late 2022 after it cut the pace of bond purchases, making it the first Group of Seven central bank to move towards withdrawing extraordinary stimulus.
The Canadian dollar, which surged to a six-week high on Wednesday, was last quoted at 1.2500 against its U.S. counterpart.
The Australian and New Zealand dollars traded near one-month highs against the greenback, supported by speculation that their central banks are more likely to follow Canada's example due to an improving economic outlook.